Options to Buy Trade Finance and Trade Credit Assets are Growing – Part I

Bank’s have been looking to distribute trade finance assets off their books for a number of years because their equity has become increasingly expensive, especially for low risk weighted assets. This has also occurred during increasing compliance costs. Banks have experimented with a number of techniques to take trade finance assets off their balance sheet in what I call an originate to distribute model. None of these efforts are trivial, cheap, or transparent.

As I mentioned in a previous post, the term “trade finance” is generally reserved for bank products that are specifically linked to underlying international trade transactions (exports or imports). As such, a working capital loan not specifically tied to trade is generally not included in this definition. Trade finance products typically carry short-term maturities, though trade in capital goods may be supported by longer-term credits.

Banks support international trade through a wide range of products that help their customers manage their international payments and associated risks, and provide needed working capital. These include products like letters of credit, specific trade loans tied to letters of credit, supply chain finance, factoring, invoice discounting, etc.

Some of the methods to take these assets off their books include:

  • Securitize trade finance assets into notes that can be purchased and resold by investors. Citibank and Santander developed a trade finance special purpose entity based in Ireland called Trade MAPs in 2013. In September of that year, Commerzbank's securitisation of pre-export and import financing transactions with financial institutions came to market called CoTrax Finance II-1. Investors can buy these rated products, but little exists, they’re not publically trade and to date product has been complex and investor unfriendly.
  • Selling bespoke CDS on trade portfolios as the banks try to gain capital relief, but many investors don’t fully understand the underlying transactions of what they are buying.
  • Private placement deals direct with investors (eg. Ex-Im Banks deals are the most popular. Those are limited to major Aircraft, etc.).

The much larger opportunity exists with trade credit. Why? Quite simply banks only touch on a small part of receivable lending for a corporate, with most of the receivables staying on the corporate balance sheet. We will explore this in Part 2 of this post.

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